Isetan Singapore and S44 tax credits

"Minority investors want Isetan to pay out tax credits" as per today's ST on page 29.

With $61mio tax credits, the investors are asking for only $2 dividend from a maximum $7.50 for a full advantage on the credits.

Does Isetan has the monies?
As per Jun 2006 accounts, it is reported that it has a $100mio cash in its balance sheet. Then why not pay since cashflow is not an issue?

Has the cash been earmarked for investment?
No such info presented. It is reported that the answer lies with the higher tax rate on income received in Japan as compared to Singapore.

Isetan Tokyo, which owns 61% of Isetan Singapore, would have to pay a higher tax in Japan on dividends received from Singapore.

Moral of the story

• Minority investors should not expect to receive much dividends from a company with this kind of tax complication.
• If you are investing for dividend yield, then please do your homework.

Merry Christmas!

Merry Christmas to you!

I think it will be an interesting year in 2007 for tax!

Section 44A balances

P/s - Pic of a very majestic bldg to be converted into serviced apartments.

The one-tier corporate tax system will be fully implemented on Jan 1, 2008.

Under the "old two-tier" system, individual shareholders receiving section 44 dividends can claim a refund in part or all of the corporate tax paid.

Example
Under the "old" system, company pays $80 dividend nett of corporate tax rate of 20%. The gross dividend would be $100. $20 has been paid by the company to IRAS. The $20 is placed in the Section 44 account.

Let us assume the individual shareholder's personal income tax rate is 10%. $10 (ie. $100 x 10%) would be taken out of IRAS's Section 44 account as credit against the tax payable by that individual.

What is the difference?
Under the one-tier system, the $80 received by the individual would be treated as exempt income. No adjustment of $10 would be given. Effectively, the individual pays a tax rate of 20% for that income.

What to do?
Companies, with accumulated profits which qualify for Section 44 credits and have the liquidity to pay dividends, may consider paying dividends before end of 2007.

So think about it.

Year-end Corporate Tax Planning

Mr Kang Choon Pin and Mr Russel Aubrey of Ernst & Young presented the following list of helpful tips to achieve some tax savings as 2006 draws to an end.

1. Bring forward your plans to buy plant and machinery.
2. Make accruals for expenses incurred.
3. Make provisions for doubtful debts.
4. Review your closing stock for obsolescene and damages.
5. Take advantage of lower effective tax rate for taxable income below $100,000.

Reference - Ernst & Young, You and the Taxman, Sep/Oct 2006.

GST in your F&B bill

Dear friends,

When you makan at a restaurant, the restaurant will almost definitely hit you with a 10% service charge on actual F&B that you consumed.

Let us take a simple example.

2 steaks @$25 $50.00
A bottle of Cardonnay $40.00

subtotal (1) $90.00
10% service charge $9.00
subtotal (2) $99.00

How much is the GST payable?
Answer - 5% of ($90.00 + $9.00) = $4.95

Mrs Lee, Director of Corporate Communications, IRAS said GST is applied on the final value of goods or services (including any indirect taxes/duties) consumed in Singapore.

P/S - For those who have gone to a movie recently - can share how they calculate GST for your movie ticket?

Reference - Straits Times - Inbox - page 45, Nov 19, 2006.

Hong Kong drops sales tax

What is proposed?
5% sales tax that would raise HKD3.8bio per annum.

Why the drop?
Politically inconvenience. Sadly it reflects very poor planning.

What is the current budget situation in HK?
1. About 1/3 of income earners pay tax. Very narrow tax base.
2. They have been living admist budget deficits.

I wonder how have they been funding their budgets year in year out.
More land sales? How much more land you can sell?
More Disneylands? Oops.. that is certainly a costly exercise.

Any alternatives?

• More "sin" taxes ie. on cigarettes and liquors. Maybe it is a good outcome afterall.
• Capital gains tax - very painful for Hong Kongers as "buying and selling" is a favourite past time activity there.
• More taxes on car - another possible good outcome of no sales tax - it would help with the smog.

I hope Hong Kongers will take action to avoid borrowing from the future generations and spend today.

GST - It is unfair to me.

Goods and Services Tax (GST) is a pay-as-you-consume tax.

So if I were to buy anything ie. anything until the day I die and buried, part of my cash is actually going to the government coffer.

Even if I were to buy from a non-GST registered retailers, he/she would charge a price that would cover the costs of its raw materials etc etc. As most of what we consumed are imported, GST is levied on these imports as they leave the ports.

All my expenses during my retirement will be funded by savings I am accumulating since I started work. These savings are derived from after-income-tax income.

Tax and tax on the same income?

Illustration
Let say my income tax bracket is 10% and GST is 7%. I assume I spend every cent of my disposable income after tax. Let's say, my annual income is $100,000.

$90,000 would be my after-income-tax income. 7% of $90,000 is $6,300.

I would have paid $16,300 in taxes for $100,000 income ie. 16.3%.

While this illustration is taking to the extreme, it serves to illustrate the importance of looking at your total tax burden over time.

I was looking forward to my retirement. But now I have to work harder as I have to protect my savings against normal inflation rate + a factor of GST.

So it now look that I will pay GST until all my funeral expenses are paid from my estate.

Bodyguard expenses not tax deductible

What is the issue?
A company seeks the High Court's decision to allow the expenses for the body guards for a director as tax-deductible expenses.

Decision - The High Court ruled that the expenses are not tax-deductible.

On what ground?
The costs of hiring the bodyguard in this case are ruled not wholly and exclusively incurred in the production of income. [Mr Goh Sher Wee’s voice on this line echoes in my empty head.] The company concerned is in the business of exhibiting motion pictures.

How much monies involved?
About $70,000 costs of body guards per annum. So at 20% corporate tax for example, that would translate to $14,000 in tax deductibles per annum. If the expenses were incurred back in 1970s till 2006, the amount involved would be substantial.

What defence has the appellant's counsel presented?

• In 1972, there was a kidnap attempt. 4 men with guns. Shot the director in the arm. Director managed to escape.
• CID recommended that the director be given the necessary protection.

Information I don’t know

• When were the expenses incurred?
• What has a 1972’s incident got to do with 2006?
• What was the motive for attempted kidnap? Was it business-related?

Even if the director is a key man to the company, the company cannot be incurring expenses for director’s personal matters.

In my opinion, there maybe some grounds for appeal if one can prove that the kidnap attempt was a consequence of the director’s action in effecting his duties for the company. The company would then be obliged to act responsibly in return.

Similarly, the President of USA is well protected at the expense of the nation and certain banks may pay for the insurance of credit card debt collection employees.

To pay IRAS/GST for service?

The front page of Business Times today presented a proposal for companies to pay for official GST help.

What is the pricing?
For advance GST guidance, $525 for each query of initial 4 hours plus $131.25 per subsequent hour. Please double the charges for express service.

Why charge?
My initial response is why. Are companies or their representative in the form of tax agent or untrained accounting staff abusing GST administration with excessive superfluous queries? Does this move contribute to higher business costs? How does GST administration justify the proposed pricing? Are there similar models operated by other government agencies or statutory boards or corporatised entities? What is/are the objectives and roles of IRAS in relation to the the "bigger picture"? How will the new pricing model contribute to that bigger picture?

Why don't charge?
I humbly drawed on my experience in the property development. The architect submits plans to the various government entities for guidance and approvals for the intended development. Relevant fees are payable. You have to pay for the use of Court facilities too. Should the same be acceptable for GST's official guidance?

There maybe some justifications.

• Firstly, there is a need for a pricing mechanism to allocate resources efficiently as resources within IRAS/GST administration is finite too (just like everywhere else).
  

• Secondly, the businesses of today are relatively complex as they traverse across national boundaries. Such business would require some level of certainty in the form of official guidance to avoid resource-sapping effort trying to recover from skirmishes with law. They want to focus on doing business. Thus the “small” sum payable for that peace of mind is definitely worthwhile.

Does it increase the costs of doing business in Singapore?
Some of these companies may be paying their tax agents for advice already. As the fees are applicable to advance (and not normal) queries, I presume such queries would only be relevant to bigger and complex companies. The fees thus would be relatively nominal.

Is there a possibility that IRAS/GST recycle official guidances? No two property development applications will ever be the same. So will 2 applications for GST guidances be similar?

Other implications
The fees, when applied, may implicitly provide a check and balance on the performance of the tax agents.

The application of the fees may also change the relationship between IRAS/GST and the enquirer. When a fee is paid for an official guidance, does it imply is a higher level of responsibility? How was it done before? Were there any official guidances given out in the past? Or does IRAS/GST wait until the actual occurrence of the transaction and relevant documents submitted for review before an official judgement is given?

KPIs of IRAS

What are the key performance indices for IRAS? I will present its KPIs using the analogy of a company's financial statement.

1. The topline has grown by 11%. Total tax revenue collected for FY05-06 is $19.9bio. This is about $2bio more than FY04-05. This upward trend has been apparent over the last 5 years.
2. Its cost of sales ie. the cost to collect a $1 tax revenue, is 1 cent.
3. IRAS's revenue is now about 70% of the Group's (ie. Government's) total operating revenue of $28bio. This is higher than last two financial years' average of 65%.
4. Sectoral performance review of its topline. IRAS received $7.3bio (37%) from corporate tax, $4.3bio (22%) from income tax, $3.8bio (20%) from GST and last $1.8bio (9%) from property tax.
5. Other operating income ie. IRAS's collection of fines and penalties. The amount of penalties collected from GST violations amounted to $76.2mio (a drastic decline of 35%). The amoun of penalties collected from income tax violations amount to $61.4mio (an even bigger decline of 46%).
6. IRAS's online business is not going as plan. What online business? IRAS wishes to encourage more e-filings. The no. of e-filers among individuals declined to 785,000 from 885,000 in FY04-05 despite an increase in total no. of taxpayers from 1.3 people to 1.5 people.
7. IRAS's bottomline ie. operating surplus of $40mio is a significant 93% improvement over the previous year.

Recommendation - This company is a strong buy with significant growth expected in most sectors that it is in. All KPI measures indicate the company is more than ready for that growth with a small black mark noted on its "online business".

Are you earning >$1million income last year?

If you did, you are one of the 1,738 who earned more than a million dollars last year out of a total 1.5 million tax payers. Then sincere congratulation to you is in order from the masses out there.

The bad news is that if you are earning exactly $1,000,001, I am sorry you do look quite bad in comparison to most of the other 1,737. Why? These 1,737 people earned about $3.5billion (minus a million from u) ie. averaging $2mio per person.

So you have to work harder!

All in all, Singapore should say thank you to 1,738 of you for paying about $500mio in income taxes (albeit only about 3% of total tax revenue).

From the sour grape here, please help me to join this real Million Dollar Club.

Cheers!

Exemption for Foreign Income

Law
Dividends, branch profits and service fee income from overseas will be exempt from tax when remitted into Singapore.

Two conditions to be fulfilled:-

• The country from which the income is received imposes a corporate tax rate of 15% or more and;
• that some tax is actually imposed in that country.

Issue #1
Tax has to be paid in the country where the profits were earned.
It must be on a first-tier "subsidiary" level basis.

Issue #2
IRAS will need to examine and grant exemption only a case by case basis upon all conditions duly satisfied.

If total dividends paid do not exceed total cumulative taxed profits, then you should be all right on the assumption that taxed profits are deemed to have been distributed first. For a young company, it would be relatively easier to sort out the taxed income from untaxed income; and why they were untaxed.

However in circulars issued in May 2006 by IRAS, exemption for foreign income would still be applicable even if no tax suffered on those income given the following:-

• utilisation of tax losses
• existence of tax free capital gains

Conclusion

The exemption is a move in the right direction as observed by Mr Sandison. Especially when our neighbours in Malaysia and Hong Kong have already done this. Why is Singapore seems to be lagging behind in inplementing changes?

But are we still too careful in loosening the apron strings?

Reference - Singapore Tax Roundup - David Sandison, PricewaterhouseCoopers, The Directors' Bulletin, Second Quarter 2006